NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis
A company has sales of Rs 500 crore, net profit of Rs 40 crore, total assets of Rs 400 crore and shareholders' equity of Rs 200 crore. Using the three-step DuPont analysis, its return on equity is:
ROE is 20%. Net margin is 8%, asset turnover is 1.25 times and the equity multiplier is 2, and their product is 20%. This equals net profit of Rs 40 crore divided by equity of Rs 200 crore, confirming the result.
- A10%
- B20%Correct
- C8%
- D40%
Explanation
Net margin = 40/500 = 8%. Asset turnover = 500/400 = 1.25. Equity multiplier = 400/200 = 2. ROE = 0.08 x 1.25 x 2 = 20%, which matches 40/200 directly. Using 8% x 1.25 alone gives 10%, which ignores leverage.
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